Tech differentiation in NGS - Fulgent Genetics

Reposting my post from cross-forum FLGT ticker board for those without access to premium.

From Fulgent’s presentation during this year’s Oppenheimer’s annual healthcare conference yesterday.

Format is as follows: summary, notes and questions from Q4 leading up to this week, and notes from the presentation and Q&A.…

Key takeaways:

  1. Details of technological underpinning explaining:
  • Historical context and genesis dating back to 1990s
  • Scale of software capacity
  • Explanations on how tech platform translates to operational leverage and differentiation
  • Credited for the cost structure
  • Software being licensed for vaccine distribution
  1. New addition to overall industry TAM, new COVID market in NGS post RT-PCR testing. Separate from PCR.
  2. Possibly prolonged revenue stream in asymptomatic return to normalcy testing environment
    4A) Antibody testing relating to post-vaccine already being offered with expected increase in demand (previously mentioned in Q3)
    4B) Asymptomatic requires sensitivity levels of RT PCR not antigen to detect
  3. New P1 variant “Brazilian variant” announced last week was first found in Fulgent’s lab
  4. Increasing degree of confidence in ability to capitalize on company brand recognition including DTC model Picture Genetics
  5. Clinical actionable market penetration compared to other competitors’ “entertainment genetics” of DTC
  6. Consistently increasing body of evidence supporting management position of days from IPO. E.g., technological prowess, financial discipline, profitability, scalability, experience, transparency and etc.
  7. Addressed a lot of the lingering reservations about competitive and sustainable advantages
  8. Additional potential upside relating to current Biden administration 1.9T. Did not factor in at all for guidance. Not factored in as well as others per below.

Prep notes: reservations unanswered / partially answered / ongoing or stemming from Q4 results:

  • Makeup of $70MM NGS 2021 guidance, C19 vs non-C19. Not separately broken out. Implications for sustained demand
  • Implications of revenue segmentation of categorizing NGS and non-NGS
  • Estimated rate of decreasing RT-PCR revenue as main plug variable for next year
  • Expected cost structure for 2022 projections with points including:
    a) Required S&M salesforce infrastructure investments
    b) Required R&D talent and equipment investments
    c) G&A maintenance and expansion
    d) Break-even and operating leverage
  • New market penetration strategy, organic and acquired
  • Sales pipeline development
  • Cross selling within newly built customer network
  • Share dilution
  • Acquisition targets
    a) Opportunity
    b) Cultural and cost Integration
    c) Timetable
    d) Cash / stock purchase
    e) Revenue / earnings multiple

Questions regarding competitive advantages to understand as a layperson:

  • How is our software and technology different?
  • What type of sequencing are we using compared to competitors?
  • How do our equipment differ from those of others?
  • With so many engineers, PhDs and MDs on all sides, how does Fulgent’s talent stack up in a post-pandemic environment?
  • What challenges does the industry face that offers the most impact measured in both a) treatment advancements b) risk reward proposition
  • Where are the inefficiencies for above?
  • How do we differ from our smaller competitors? Larger competitors?

Specific competitor related, Invitae NVTA (neutral to negative opinion):

  • What are the underlying reasons for NVTA’s acquisitive growth?
  • How come they bought an AI / machine learning company for their technology? How come not developed in-house? Lacking talent? Expertise?
  • Most recent CEO appearance on CNBC, the targeted financial metric was carefully qualified as “cash flow positive” compared to profitable. Is this an acceptable substitute for earnings for a product based biotech company? Providing benefit of doubt, maybe just temporary metric until earnings?
  • What’s going on with their share dilution as a strategy? Empire building?
  • Why does famed Cathie Wood back NVTA as market leader? (and why not a little bit of spotlight with us too here at Fulgent? lol)
  • How will their consumer based approach work once acquisition streak slows? (And how does that compare to our DTC sales strategy for subsidiary Picture Genetics with recently national brand recognition?
  • Does organic growth take too long? How long? Is the market too segmented? How come? Is the initial market share worth the tradeoff? Part to whole consolidation premium?

Specific competitor related, Quest Diagnostics DGX (positive opinion):

  • How much of what we’re after at FLGT is already commoditized by the incumbents?
  • How do we compete against their infrastructure and size?
  • What are we doing that they’re not? And vice versa.
  • How do we reach this size but still maintain small cap growth potential and multiples?
  • What lessons can we avoid from mistakes already made by establishment?
  • What threats do we face from incumbents?
  • What’s the difference in intellectual horsepower of us and them? Technologically?

Considerations from the perspectives of a “retail limited partner”

  • How valid are the current steep discounts applied to by other market participants?
  • Anchoring fallacy. Current entry / share price relative to cost basis of a) initial b) average c) most recent
  • Position sizing
  • Being swept away in momentum, either narrative or contrarian
  • Market cap and shares outstanding
  • Fallacy of false precision. Estimating terminal value of optionality and unknown potential.

Kevin D from Oppenheimer opening remarks

Paul Kim Presentation w/ accompanying slides (per link above):
Fulgent was formed by combination of 3 groups coming together, CEO COO CFO, from predecessor company called Cogent. In biz of biometric software, analyzing and interpreting large datasets. tens and hundreds of million test
Biometric software
Big data AI
Not just tag lines for us
AI Big data very familiar
Application of that in field of genomics offer distinct advantage, other companies use just as tag lines
2nd group Dr. Gao from City of Hope and
3rd group Brandon and team from Baylor
Distinct Technology platform
Add content in test
Introduce new test
More importantly, Utilized for operations for massive scale. Originally built
Tech platform Allows to be more inefficient and less contingency and less prone for errors

Public 2016 as rare diseases pediatrics
2017 and 2018 Brandon brought on and beefed up commercial and sale strategy
Meanwhile, into cancer and
Expand into reproductive health
End 2019 grew over 50% organically 32m close to accounting GAAP profitability
2020 COVID hit
Prime position to capture for covid 420MM, all organic
80 gross margins 70 operating margins
2020 few companies changing landscape we were one of the only company to offer guidance, actually offered and revised multiple
2021 similar approach, have guidance, feel very, very comfortable with estimate from last week, overall and NGS
Balance sheet, 625MM approx. cash
Very comfortable with ability to generate cash coming quarters

Kevin (transition to Q&A format): Couple things today: Items with slide with announcement with contract CDC for NGS based variant testing. Walk us through committed funding and little bit of context with competitive landscape and sizes… Committed funding. Visibility. 2021 timeframe?

Paul: Short answer. Many programs. Many large programs. This was one of them. This contract even more confidence for regular and NGS basis. Significant of this contract for company. Competitive dynamics and company overall.

Really, very pleased with contract award from CDC yesterday.
Really demonstrate fulgent capabilities and confidence working with our government collectively combat COVID disease
Fulgent was not in infectious disease area. However start with 0 and 420mm even last year
With record speed. Fundamental is technology. IT software. AI algorithm. And cloud computing.
Team really bring experience. Build large scale with homeland security. 2006 had to handle a million transactions per hour
This large scale software team to this market
Stress test our capability. How quickly we can ramp up production. And how well we can handle transaction
Take a look at entire period, reason CDC award large scale contract compared to other peers is really demonstrate our government has with the confidence with fulgent team.
Hear about difficulties and problems all other peers had
Long time testing period. Resulting in few days to weeks. Missing data. Missing the sample. Contamination issues.
Fulgent did not have any no issues any
Through competitive bid for every large contracts, we brought new standards. Demonstrate speed, accuracy and reliable. We demonstrate trustworthy. Government federal and local. Contain this pandemic.
Many other areas we can explore post this pandemic.
But really this opportunity showed investment community reason we can participate as a company, how we work with government to contain pandemic when needed, but in addition, enter genetic diagnostic continued performance. Our team can continue to perform. NGS demonstrate our capability. Not just large volume but depth of our experience and extent of how this team and how we effective we can compete in this market.
But also compete with some vendors who try to give test free. Give away. And we won.
With this kind of large scale. With a sustainable business model.

Extremely Helpful. Strategic value has brought to market.
Add bit more granularity on some of financial metric for contracts? PCR Pretty transparent reimbursement 100 per test. This is different econ model. Relative range on pricing? Per sample basis? NGS variant basis? NGS biz before last year was trending 50 60 percent gross margin, how do we think about this variant testing. In relatively new market.

General framework. Brandon probably add more details
I can tell you Kevin we will set up new standard in industry. Our pricing to government it is probably half of price for our peers in this market who try to give their test away. Even in this level of competitive we will deliver FLGT genetics proper profit margins. To keep this business sustainability. For this contract. We will deliver clear message to this market and to our peers. The game of burning cash, is over. Claims lowest cost supplier of test. It’s over. lowest cost supplier of test. Its over. Fulgent will deliver our price will be half their cost. How do they compete? They Our cost to customer will behalf theirs. They can continue to give away for free. But what value do they give? We give integrated solution to customer… We always deliver value. Customers will gradually realize. In this market. People try to copy amazon model. Into lowered price capture market and then eventually hike the price. But we will also be upfront. Demonstrate . Build sustainability. Business discipline in market to compete. To show rest of year to deliver message to market. When we interest, we can compete against anybody.

Initial award is 24.1MM, That’s initial order so to speak. Contract value up to 47.1MM largest in company history and more than all of 2020 NGS. Contract big win for company. Continue to fuel hyper growth trajectory. Not only lab for NGS and tracking but our contract multiple times bigger than others combined. We took lion share. Incredibly well positioned. Turnaround time capacity, appreciate CDC trust in our company. Monitoring and genomic studies important. More contagious? More dangerous? More popping up? Vaccines? Along those lines.

Even with competitive pricing
Definitely true. GM even with competitive pricing, as Ming indicated.
Coopetitor pricing truly bring real value.
Real sustainable adoption.
Transparent. Public company. Posting these numbers. For customers. Trying to adopt NGS long term in sustainable ways.
GM same profile as rest of business. All run on technology platform.
and then as far as revenue timing, even before announcement of contract, Q1 there are NGS estimates already comfortable, as of today. Without this contract.
When is this contract going to kick in? for our revenues? Probably within in the next couple weeks. Can start generating revenues. How long will it last? See as long term opportunity. Just like the customer. Multiyear. Really validating our capabilities. Being at the cutting edge of research, particularly in NGS, governing body as CDC, not only validates company, brings in revenues, and margins but it serves as another point of evidence as Fulgent’s capabilities particular in the areas of NGS and sustainable revenues. One more thing to add, is some of the investors may be concerned about what may be happening in the testing landscape, but that part we cannot control but we can control is our positioning within that market. And can tell you that by our estimation our market share in the PCR continues to grow. We have more customers. Each of these customers may have varying degrees of demand depending on what is happening in their region but we continue to win customers and market share continues to grow.
I guess what I’m trying to say is with everything being equal, when people take a look at demand in the positivity rates, it might not translate into exactly corollary with the business demand based on our increasing market share.

One or two items to follow up on. Guidance on 800MM for 2021 including 70M from NGS, does that 70MM contemplate CDC contract? How should we think about yesterday’s disclosure? Per guidance?

Short answer is not much. As we have indicated. There are a number of NGS projects, that are close to us to hear back. This certainly was one of them. And when we laid out guidance. We felt pretty comfortable that we would be able to win at least a couple of projects such as this so we incorporated that into the guidance. But if we didn’t end up winning any of those we would have kept the guidance the same anyways because our approach for guidance is to lay out what we think we can achieve based on what we see. But if we see more evidence, based on additional wins or changing landscape, then we raise the guidance which is the approach we took in 2020 and we’re taking the same for 2021. Because I don’t think anyone knows how this landscape is going to evolve. And how long its going to last in 2021. I believe the general consensus is that level of service will go down and that’s the reason for the estimate, including the estimates for the company, we have the covid revenues decreasing in the second half of the year, and if that happens we feel comfortable with the guidance we laid out. If that doesn’t happen for some particular reason, based on some of these variables that we talked about, including the variants and the effectiveness of vaccines and so forth then we’ll adjust the guidance accordingly.

And then one topic we get fair amount of questions in the last couple days. How to think about the contract dynamics for these new NGS contracts that are out there. PCR testing some of the company’s early wins in the high profile jurisdiction like LA county and others, contribute positively to future contract wins for the balance of 2020 and beyond. Help us think about for NGS for the landscape for additional beyond CDC. Dynamics here are obviously quite different than PCR market.

In addition to the variants monitoring, we have ongoing projects with bio pharma, biotech, and others that want to see the sequence of this virus. NGS is not just for political purposes for contracts but there are still tons of research going into covid 19, vaccines as well as therapeutics. We see this used in both these situations. I’ll just comment as well kind of piggy backing off Paul was saying, number of cases coming down is a good thing. And I think there’s a one to one correlation. With testing coming down. What we don’t think is fully appreciated is the amount of work and effort that’s going into asymptomatic testing now. If you look at some of our largest wins initially, being the municipalities and drive-thrus, the symptomatic testing that’s true. But today, some of our largest customers are government entities, large corporations, large school districts, large colleges, that are using RT PCR most sensitive test, that need to be used, in asymptomatic setting. This sort of return to work, return to school, return to normalcy, testing, has been really important to Fulgent. We continue to grow that. The Biden admin is laying out national testing programs for schools and entities. Cruise lines, going back to sailing someday. They’re going to have programs. Laid out by CDC. There’s going to be a lot of interest in Fulgent’s platform as it relates to return to normalcy program. Which is outside of what we’ve been doing for symptomatic testing patients.

And that last point is a really interesting one. I do think that for some discussion. Remind us again in your view performance differences of PCR test and are there other screening modalities in asymptomatic testing population. And particularly relevant increased vaccination coverage. Pretty good data on Pfizer increasing on some others that hospital rates would go down dramatically. Infection go down also. Asymptomatic cases in previously vaccinated remains a very real number. There are probably 2 or 3 components but just some context for vaccine landscape feeds into asymptotic population and what does that mean for PCR?

We think that it strengthens our position. RTPCR in this pandemic. No debate. Most sensitive testing is RCTPCR. Antigen tests being rapid is great but there seems to be some question of performance and specificity of antigen tests in asymptomatic individuals. Still to this day. CDC and other governing bodies, RT PCR gold standard. And we think that RT PCR will continue to be most commonly used test in asymptomatic testing. In addition, as Ming mentioned early on. Our testing is rapid. We’re getting results out in 16 hours, 14 hours within 24 hours somewhere around that range depending on when we receive them during the day. So we think that rapid RT PCR is going to continue to be the gold standard especially in asymptomatic return to normalcy type setting.

And also, we are in covid 19 helping government and community to control the pandemic. Actually, LA county, we also started working with the counties to administrate the vaccine distribution projects. We are working on that one. And the county licensed our software to administrate treatment and monitoring services. So we do see new test will be required to continue monitoring vaccine effectiveness and antibody levels stainable. Those tests being offered by fulgent already.

So we are continue working on Covid19, we have not lost focus on our traditional NGS business. As fulgent name getting more and more, recognize in this market our product and direct to home products, receiving quite a lot of attraction. We will deliver clinical actionable genetic testing to consumer. Which some other companies try before. Through sort of “entertainment genetics”. But we deliver real value. We do believe we have a real cost advantage while maintain our margins. If you took look at RT PCR, many companies, big ones, couple big ones on wall trees and new one [smaller] growing up ones, we compete with both fronts. New startups they have low overhead costs and in infrastructure, we win in that market. We gain share and we wipe them out. From the big ones, they were being supported by the government, the pharmas and equipment manufacturers but we also win that market. We demonstrate through last year. We do quicker. We do faster. We do cheaper. But no one can believe our results. What we delivered. The margin we deliver last quarter is not by design, it’s through a competitive bid. Our competitors they bid higher price but did not deliver the same bottom line as we did. It shows how effective our technology. Our tech IT platform.

One kind of follow-up. Came up by few folks, What is the trigger mechanism for additional funding for currently allocated? Is it time based? Exact component?

I can answer first then Paul and Brandon probably. We probably started bidding these contacts a month ago. So by then there was no 1.9T. So we do believe with 1.9T approval we will have additional funding. Second funding because we did not intend to count this value of contract because we were uncertain. The government disclosed on the internet so we had to follow protocol. There is remaining funding.

Closing remarks